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Business models, PnLs - for startups




                                                                                http://www.flickr.com/photos/kidswithcourage/4588175282/sizes/o/




(cc) BY NC SA, Rodrigo SEPULVEDA SCHULZ - www.rodrigosepulveda.com - May 2011
Summary

• Business models


• Generic PnL


• Key insights (think KPI!)
1. Business models
Revenue = Price x Qty




                        x3
R = R1 + R2 + ... = P1 x Q1 + P2 x Q2 + ...
~ ~
let’s simplify with : R = P x Q
~ ~
let’s simplify with : R = P x Q




               - are you a VOLUME business ?
~ ~
let’s simplify with : R = P x Q




               - are you a VOLUME business ?



               - are you a PRICE based business ?
Volume business (usually low margin)
Price-based business (usually high margin)
the famous ‘demand curve’


          P


     10€




     5€



     2€

                                  Q
              100   200     500
the famous ‘demand curve’


          P


     10€            R = 10€ x 100 = 1.000€




     5€



     2€

                                             Q
              100   200             500
the famous ‘demand curve’


          P


     10€            R = 10€ x 100 = 1.000€



                      R’ = 5€ x 200 = 1.000€
     5€



     2€

                                               Q
              100   200             500
the famous ‘demand curve’


          P


     10€            R = 10€ x 100 = 1.000€



                      R’ = 5€ x 200 = 1.000€
     5€

                                      R” = 2€ x 500 = 1.000€
     2€

                                               Q
              100   200             500
can you be a volume + price based business?
can you be a volume + price based business?
can you be a volume + price based business?
shift the ‘demand curve’ - hard, requires a unique
value proposition sustained by heavy marketing


           P


     10€




      5€



      2€

                                    Q
               100   200     500
shift the ‘demand curve’ - hard, requires a unique
value proposition sustained by heavy marketing


           P


     10€




      5€



      2€

                                    Q
               100   200     500
shift the ‘demand curve’ - hard, requires a unique
value proposition sustained by heavy marketing


           P

                                   R = 10€ x 500 = 5.000€
     10€
                                            (5x)


      5€



      2€

                                       Q
               100   200     500
Read more:




             http://www.amazon.com/Microeconomics-7th-Robert-Pindyck/dp/0132080230/ref=sr_1_1?ie=UTF8&qid=1304956318&sr=8-1
Costs = Variable Costs x Qty + Fixed Costs
Variable Costs : anything that can be directly
correlated with ONE extra sale of product/service

• COGS : Cost of Good Sold = Cost of Revenue


• usually the cost of raw materials necessary to produce a new
  product,
  or the cost of original item if re-selling


• add to that anything that can be linked directly:


   • commission on each sale; % fee on bank; average shipping
     & handling cost (if not added)...


• remember to think in AVERAGE terms
Fixed Costs (standardized) -
main goal is to make them variable

• Sales & marketing (S&M)




• Product / R&D / Technology




• HR : can be factored almost into Product,
  S&M, G&A


• General & Administration (G&A) : rent,
  lawyers, travel & expenses...
Margin = Revenue - Costs

•M=R-C


• M = ( average Price x Q ) - ( fixed costs + variable cost x Q)


• M = (average price - variable cost) x Q - fixed costs


• M = (Unit margin) x Q - FC
focusing on unit margin gives you great insights

• M = (Unit margin) x Q - FC means


  • M > 0 only if


     • unit margin is > 0


     • (Unit margin x Q) > fixed costs
focusing on unit margin gives you great insights

• M = (Unit margin) x Q - FC means


  • M > 0 only if


     • unit margin is > 0


     • (Unit margin x Q) > fixed costs




                                         can you keep
                                           your fixed
                                          costs low ?
focusing on unit margin gives you great insights

• M = (Unit margin) x Q - FC means


  • M > 0 only if


     • unit margin is > 0


     • (Unit margin x Q) > fixed costs




  are you a                              can you keep
price based                                your fixed
 business ?                               costs low ?
focusing on unit margin gives you great insights

• M = (Unit margin) x Q - FC means


  • M > 0 only if


     • unit margin is > 0


     • (Unit margin x Q) > fixed costs




  are you a                    are you a   can you keep
price based                 volume based     your fixed
 business ?                   business ?    costs low ?
2. Generic PnL
startup finance is like wartime medicine :
ugly but works




                   http://www.olive-drab.com/od_medical_www.php
Let’s start a T-shirt business !
Sample
company in
 this space
Sample
company in
 this space
Sample
company in
 this space
Sample
company in
 this space
Sample
company in
 this space
Sales: remember to focus on UNITS

• let’s be competitive, and check
  prices from competition (sales-
  minus approach, vs. cost-plus
  approach).


• Let’s build a business plan on a
  14,99€ average price point
  for T-shirts


• We can expand into segmentation of
  products, of prices, etc. later.
Sales : let’s assume I sell a few first per day, then
start increasing sales

• Assumptions :


  • 4 T-shirts sold per day


  • biz open online 24/7 = 30 days /month => 120 T-shirts/month


  • 5% growth / month, but decreasing slowly to adjust for linear growth


  • average price: 14,99€ (incl. VAT !)
    (19.6% in France means 12,53€ excl. VAT) -
    checked with market price/competition
let’s first model Revenue - you can play with variables later:
such as discounts, promotions, and fluctuating demand per season
2. COGS (direct costs)

• let’s assume a white T-shirt bought online from a supplier


• look for economies of scale


• don’t forget S&H (incl. here)


• your business plan
  should be VAT-free.
  Don’t add it, only for
  Cash-Flow statements


• Make sure you order with
  enough lead-time (1 month?)
let’s now model direct costs - you can play with variables later :
 white T-shirts + stickers + shipping




Gross margin has
   to quickly
  become >0,

  >50% is best
3. Indirect costs

• assumptions (t0 = launch of site, add as much HR+G&A for research before)


  • sales & marketing : only Google Adwords SEM (assuming cost based
    on conversion rates) + a launch budget for display (3 months).


  • technology : using a hosted solution to start with :12€/month
    http://commander.1and1.fr/xml/order/Eshops


  • HR : based on number of people to prepare and ship T-shirts + founder
    (finance, marketing, etc.) - everything else outsourced (incl. as costs)


  • G&A : rent, insurance, pro services, etc. assuming a fixed cost :
    rent as soon as a hire (300€/person), accountants, phone bills, etc.
last, let’s model indirect costs - you can play with variables
later :
Now that your model is built : check for errors

                                       use ‘track depencies’ to check formulas



                                        I always use YELLOW for variables -
                                             check them for likeliness


                                             often use italic to indicate
                                                a result of a formula

                                        graphing an excel row (variable or result)
                                            makes it easier to check validity


                                           checking per period (quarter, year)
                                                  is useful + % sales

ps: beware of the last column of a model (doesn’t take into account the next period)
good practices

• Put the hypothesis on each month (eg. growth) : it’s then very easy to
  adjust for seasonal fluctuation, or acceleration of growth rate


• Always good to put reality checks in the excel sheet. you can always hide
  them later. I put them in italic.


• always good to number each sections item, makes it very readable


• make sure you document every important cell or formula




• it’s best to put assumptions in a separate sheet afterwards.
Read more:




     http://www.amazon.com/Financial-Modeling-Simon-Benninga/dp/0262026287/ref=sr_1_1?s=books&ie=UTF8&qid=1304957285&sr=1-1
3. Key Insights (KPIs)
Break down analysis as %sales / year (~ per unit)




                                 Helps understand breakdown of
                                 costs, and efficiency potential
Graphs (and values) show profit >0 ~ month 35...
Changing variables allows to tweak & adjust
  business model
                                             Just changing price from 14,99€ to
                                           18,99€ brings profitability at ~month 24
                                           (1 year ahead). Volume to be adjusted.

                                            will the offer be competitive and
                                                        attractive?




 Changing sales volume from 4/day to
10/day brings profitability at ~month 23
 (1 year ahead). Price to be adjusted +
         marketing expenditure.

 Can you validate conversion rates
  early enough, hence marketing
  expenses and traction of offer ?
Summary 1 : building a business model

• Build a model of your business : the algorithm first, with all relevant
  variables


• Make your spreadsheet easily readable, commented, well formatted :
  you’ll use it to fine-tune your business, and to share with investors later on


• Don’t forget to double-check in all possible ways for errors


• Then, check that your variables are in a realistic range


• Finally, and only then, start testing different scenarios by just changing
  one or two variables.
Summary 2: key insights

• Breakdown in 100% of revenue of ONE unit of sales


• When are you profitable ? (in months?)


• How many units do you need to sell to be profitable ?


• Elasticity of variables (impact of each on target objective;
  examples = profitability, market share, revenue milestone, etc.)




• In upcoming class on fundraising :
  helps assess how much money you need to raise
www.rodrigosepulveda.com

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Startup PnL Model

  • 1. Business models, PnLs - for startups http://www.flickr.com/photos/kidswithcourage/4588175282/sizes/o/ (cc) BY NC SA, Rodrigo SEPULVEDA SCHULZ - www.rodrigosepulveda.com - May 2011
  • 2. Summary • Business models • Generic PnL • Key insights (think KPI!)
  • 4. Revenue = Price x Qty x3
  • 5. R = R1 + R2 + ... = P1 x Q1 + P2 x Q2 + ...
  • 6. ~ ~ let’s simplify with : R = P x Q
  • 7. ~ ~ let’s simplify with : R = P x Q - are you a VOLUME business ?
  • 8. ~ ~ let’s simplify with : R = P x Q - are you a VOLUME business ? - are you a PRICE based business ?
  • 11. the famous ‘demand curve’ P 10€ 5€ 2€ Q 100 200 500
  • 12. the famous ‘demand curve’ P 10€ R = 10€ x 100 = 1.000€ 5€ 2€ Q 100 200 500
  • 13. the famous ‘demand curve’ P 10€ R = 10€ x 100 = 1.000€ R’ = 5€ x 200 = 1.000€ 5€ 2€ Q 100 200 500
  • 14. the famous ‘demand curve’ P 10€ R = 10€ x 100 = 1.000€ R’ = 5€ x 200 = 1.000€ 5€ R” = 2€ x 500 = 1.000€ 2€ Q 100 200 500
  • 15. can you be a volume + price based business?
  • 16. can you be a volume + price based business?
  • 17. can you be a volume + price based business?
  • 18. shift the ‘demand curve’ - hard, requires a unique value proposition sustained by heavy marketing P 10€ 5€ 2€ Q 100 200 500
  • 19. shift the ‘demand curve’ - hard, requires a unique value proposition sustained by heavy marketing P 10€ 5€ 2€ Q 100 200 500
  • 20. shift the ‘demand curve’ - hard, requires a unique value proposition sustained by heavy marketing P R = 10€ x 500 = 5.000€ 10€ (5x) 5€ 2€ Q 100 200 500
  • 21. Read more: http://www.amazon.com/Microeconomics-7th-Robert-Pindyck/dp/0132080230/ref=sr_1_1?ie=UTF8&qid=1304956318&sr=8-1
  • 22. Costs = Variable Costs x Qty + Fixed Costs
  • 23. Variable Costs : anything that can be directly correlated with ONE extra sale of product/service • COGS : Cost of Good Sold = Cost of Revenue • usually the cost of raw materials necessary to produce a new product, or the cost of original item if re-selling • add to that anything that can be linked directly: • commission on each sale; % fee on bank; average shipping & handling cost (if not added)... • remember to think in AVERAGE terms
  • 24. Fixed Costs (standardized) - main goal is to make them variable • Sales & marketing (S&M) • Product / R&D / Technology • HR : can be factored almost into Product, S&M, G&A • General & Administration (G&A) : rent, lawyers, travel & expenses...
  • 25. Margin = Revenue - Costs •M=R-C • M = ( average Price x Q ) - ( fixed costs + variable cost x Q) • M = (average price - variable cost) x Q - fixed costs • M = (Unit margin) x Q - FC
  • 26. focusing on unit margin gives you great insights • M = (Unit margin) x Q - FC means • M > 0 only if • unit margin is > 0 • (Unit margin x Q) > fixed costs
  • 27. focusing on unit margin gives you great insights • M = (Unit margin) x Q - FC means • M > 0 only if • unit margin is > 0 • (Unit margin x Q) > fixed costs can you keep your fixed costs low ?
  • 28. focusing on unit margin gives you great insights • M = (Unit margin) x Q - FC means • M > 0 only if • unit margin is > 0 • (Unit margin x Q) > fixed costs are you a can you keep price based your fixed business ? costs low ?
  • 29. focusing on unit margin gives you great insights • M = (Unit margin) x Q - FC means • M > 0 only if • unit margin is > 0 • (Unit margin x Q) > fixed costs are you a are you a can you keep price based volume based your fixed business ? business ? costs low ?
  • 31. startup finance is like wartime medicine : ugly but works http://www.olive-drab.com/od_medical_www.php
  • 32. Let’s start a T-shirt business !
  • 38. Sales: remember to focus on UNITS • let’s be competitive, and check prices from competition (sales- minus approach, vs. cost-plus approach). • Let’s build a business plan on a 14,99€ average price point for T-shirts • We can expand into segmentation of products, of prices, etc. later.
  • 39. Sales : let’s assume I sell a few first per day, then start increasing sales • Assumptions : • 4 T-shirts sold per day • biz open online 24/7 = 30 days /month => 120 T-shirts/month • 5% growth / month, but decreasing slowly to adjust for linear growth • average price: 14,99€ (incl. VAT !) (19.6% in France means 12,53€ excl. VAT) - checked with market price/competition
  • 40. let’s first model Revenue - you can play with variables later: such as discounts, promotions, and fluctuating demand per season
  • 41. 2. COGS (direct costs) • let’s assume a white T-shirt bought online from a supplier • look for economies of scale • don’t forget S&H (incl. here) • your business plan should be VAT-free. Don’t add it, only for Cash-Flow statements • Make sure you order with enough lead-time (1 month?)
  • 42. let’s now model direct costs - you can play with variables later : white T-shirts + stickers + shipping Gross margin has to quickly become >0, >50% is best
  • 43. 3. Indirect costs • assumptions (t0 = launch of site, add as much HR+G&A for research before) • sales & marketing : only Google Adwords SEM (assuming cost based on conversion rates) + a launch budget for display (3 months). • technology : using a hosted solution to start with :12€/month http://commander.1and1.fr/xml/order/Eshops • HR : based on number of people to prepare and ship T-shirts + founder (finance, marketing, etc.) - everything else outsourced (incl. as costs) • G&A : rent, insurance, pro services, etc. assuming a fixed cost : rent as soon as a hire (300€/person), accountants, phone bills, etc.
  • 44. last, let’s model indirect costs - you can play with variables later :
  • 45. Now that your model is built : check for errors use ‘track depencies’ to check formulas I always use YELLOW for variables - check them for likeliness often use italic to indicate a result of a formula graphing an excel row (variable or result) makes it easier to check validity checking per period (quarter, year) is useful + % sales ps: beware of the last column of a model (doesn’t take into account the next period)
  • 46. good practices • Put the hypothesis on each month (eg. growth) : it’s then very easy to adjust for seasonal fluctuation, or acceleration of growth rate • Always good to put reality checks in the excel sheet. you can always hide them later. I put them in italic. • always good to number each sections item, makes it very readable • make sure you document every important cell or formula • it’s best to put assumptions in a separate sheet afterwards.
  • 47. Read more: http://www.amazon.com/Financial-Modeling-Simon-Benninga/dp/0262026287/ref=sr_1_1?s=books&ie=UTF8&qid=1304957285&sr=1-1
  • 48. 3. Key Insights (KPIs)
  • 49. Break down analysis as %sales / year (~ per unit) Helps understand breakdown of costs, and efficiency potential
  • 50. Graphs (and values) show profit >0 ~ month 35...
  • 51. Changing variables allows to tweak & adjust business model Just changing price from 14,99€ to 18,99€ brings profitability at ~month 24 (1 year ahead). Volume to be adjusted. will the offer be competitive and attractive? Changing sales volume from 4/day to 10/day brings profitability at ~month 23 (1 year ahead). Price to be adjusted + marketing expenditure. Can you validate conversion rates early enough, hence marketing expenses and traction of offer ?
  • 52. Summary 1 : building a business model • Build a model of your business : the algorithm first, with all relevant variables • Make your spreadsheet easily readable, commented, well formatted : you’ll use it to fine-tune your business, and to share with investors later on • Don’t forget to double-check in all possible ways for errors • Then, check that your variables are in a realistic range • Finally, and only then, start testing different scenarios by just changing one or two variables.
  • 53. Summary 2: key insights • Breakdown in 100% of revenue of ONE unit of sales • When are you profitable ? (in months?) • How many units do you need to sell to be profitable ? • Elasticity of variables (impact of each on target objective; examples = profitability, market share, revenue milestone, etc.) • In upcoming class on fundraising : helps assess how much money you need to raise

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